By Kristina Peterson and Jon Hilsenrath
Federal Reserve officials dialed up their efforts to boost the
sluggish U.S. economy and said they were ready to do more if necessary
to spur job growth.
They acted despite worries inside and outside the Fed that the central
bank already has done all it can do to invigorate the disappointing
economic recovery.
The Fed said Wednesday it would extend through the end of the year a
program known as "Operation Twist," which aims to drive down long-term
interest rates and reduce borrowing costs for businesses and
households. Under the program, the Fed sells short-term securities and
uses the proceeds to buy longer-term securities.
Fed Chairman Ben Bernanke made clear in a news conference after the
policy makers' meeting that he is prepared to take further action if
he doesn't see progress on bringing down unemployment, which was 8.2%
in May.
"I wouldn't accept the proposition though that the Fed has no more
ammunition," Mr. Bernanke said. He added, "If we don't see continued
improvement in the labor market, we'll be prepared to take additional
steps."
Those and other comments made clear that Mr. Bernanke remains a policy
activist as another summer economic slowdown threatens. His tone also
marked a departure from the April news conference, when Fed officials
appeared to be comfortable with the economy's progress and prepared to
stand pat rather than undertake new measures to spark growth.
(This story and related background material will be available on The
Wall Street Journal website, WSJ.com.)
Three consecutive months of disappointing job gains and mounting
worries about Europe's financial turmoil helped change their view.
"Growth in employment has slowed in recent months," the Fed said in
its policy statement, adding that "household spending appears to be
growing at a somewhat slower pace than earlier in the year" and that
financial strains from overseas posed "significant downside risks to
the economic outlook."
Investors were initially disappointed the Fed didn't take more
aggressive action Wednesday. The Dow Jones Industrial Average finished
the day down 12.94 points, or 0.1%, to 12824.39, after at one point
dropping by nearly 100 points.
The first-stage, $400 billion Operation Twist program had been
scheduled to end this month. By extending it by six months, the Fed
will be purchasing an additional $267 billion in Treasury bonds and
notes with maturities ranging from six to 30 years, and selling an
equivalent amount of securities with maturities of three years and
less. This extension effectively expands Twist to $667 billion. By the
time the program ends in December, the Fed will have almost no
holdings maturing through January 2016.
Some analysts were skeptical about the impact of the Fed's latest
move. "It's doubtful that this will really help revitalize the U.S.
economy, mainly because domestic demand remains weak and financial
strains from Europe are likely to continue," said Tanweer Akram,
senior economist with ING Investment Management.
The impact of the Fed's decision to extend Operation Twist will likely
be "pretty limited," said Paul Ashworth, chief U.S. economist at
Capital Economics, "but I don't think there's any sort of magic cure
anyway."
Operation Twist is smaller than the Fed's earlier bond-buying programs
and interest rates are already extremely low, he added.
"Any monetary action in the current economy is pretty limited because
of the uncertainty, lack of confidence, credit constraints" and other
headwinds, Mr. Ashworth said, but the Fed would be uncomfortable
refraining from any action. "Their view has always been 'better to try
to do something' rather than throw your hands up and say 'there's
nothing we can do.'"
Mr. Bernanke resisted criticism that extending Operation Twist would
have little effect.
"We did take a substantive step today," he said. Continuing the
program for six more months should push down long-term interest rates
and ease financial conditions more, he said.
The Fed already has pushed short-term interest rates to near zero,
held them there since late 2008 and assured the public they are
unlikely to move up through late 2014. It has also bought more than
$2.5 trillion worth of Treasury and mortgage securities, in an effort
to drive down borrowing costs, push up stock prices and shift
investors into riskier holdings. The net effect, the Fed hopes, is to
ease the burden of past debts for households and businesses and make
them more willing to take risks such as hiring or investing today.
Among the possible next steps listed by Mr. Bernanke: a new
bond-buying program, known as "quantitative easing," in which the Fed
buys even more long-term Treasury bonds or mortgage-backed securities
and pumps money into the financial system in the process.
The Fed could also change its pledge on short-term interest rates and
say it expects to hold rates near zero beyond 2014. Nearly a third of
Fed officials polled at the policy meeting said they favored keeping
rates low until at least 2015.
Mr. Bernanke said he also is watching an effort by the Bank of England
to funnel credit to the private sector by offering cheap loans to
banks only if they pass it on to households and businesses. "This will
be a type of thing that will be on the list of programs we look at,"
Mr. Bernanke said.
Accompanying the Fed's announcement was a bleak update to the central
bank's own economic forecast, lowering its expectations for economic
growth and raising its forecast for the unemployment rate. Fed
officials now project the economy will grow by between 1.9% and 2.4%
this year, a half-percentage-point slower than they thought in April,
and that it will grow by less than 3% next year. They also said they
see the jobless rate at 7% or above by the end of 2014.
Mr. Bernanke cited risks to the outlook, such as Europe's escalating
debt woes. Other headwinds to growth he cited include business and
consumer worries about the U.S. government's budget policies and a
housing sector still damaged by the excesses of the 2000s borrowing
boom.
Mr. Bernanke noted that inflation had subsided recently, primarily
reflecting lower oil and gasoline prices. Fed officials Wednesday
revised their estimates of inflation to between 1.2% and 1.7% this
year, down from 1.9% to 2.0% in April.
Some economists noted later that the Fed might be prodded into taking
more aggressive action if a more significant drop in inflation sparked
worries of deflation. The Fed's inflation forecasts receded a bit, but
officials have been far less worried about deflation recently than
they were immediately after the financial crisis and in 2010. Mr.
Bernanke said Wednesday that the Fed's second round of bond-buying
"ended what looked to be an incipient deflation problem."
Federal Reserve Bank of Richmond President Jeffrey Lacker voted
against his colleagues' action on Wednesday because he "opposed
continuation" of Operation Twist, according to the statement issued
after their meeting. Mr. Lacker has dissented at all four FOMC
meetings this year.
However, two new Fed governors--Jeremy Stein and Jerome Powell--voted
with Mr. Bernanke at their first policy meeting since they were
confirmed by the Senate in May. The vote was 11-1.
(END) Dow Jones Newswires
June 20, 2012 19:14 ET (23:14 GMT)
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